Good afternoon. My name is Julian, and I will be your conference operator today. At this time, I would like to welcome everyone to Nutanix Q4 and Fiscal Year 2019 Earnings Conference Call. Thank you. Tonya Chan, Vice President of Corporate Communication And Investor Relations.
You may begin your conference.
Good afternoon, and welcome to today's Private call to discuss the results of our fourth quarter full year of fiscal 2019. This call is also being broadcast over the web and can be accessed in the Investor Relations section of the Nutanix website. Joining me today are Girish Pandey, Nutanix's CEO and Dustin Williams, Nutanix's CFO. After the market closed today, Nutanix issued a press release announcing the financial results for its fourth quarter fiscal year of 2019. If you'd like a copy of the release, you can find it in a press release section of the company's website.
We'd like to remind you that during today's call, management will make forward looking statements within the meaning of the Safe Harbor provisions of federal securities laws, regarding the company's anticipated future financial performance in very curious, including anticipated revenue, software and support revenue, hardware revenue, billing, software and support billing, hardware billing, gross margins, operating expenses, net loss, net loss per share, and free cash flow. We assumptions underlying our anticipated future financial performance, our plans to provide future projections and financial guidance, our business plans, initiatives, and objectives, including our plans for pipeline and demand generation expansion, our focus on growing our commercial business, potential go to market transitions, our continued investment in technology, including our subscription based products, talents, and sales and marketing efforts, the expected impact of these investments and our plans to manage operating expenses if our future financial performance does not meet our expectations. Our ability to achieve such planned business plans, initiatives and objectives successfully in a timely manner, and the impact of such business plans, initiatives, and objectives on our business, competitive position and financial performance. Demand for and customer adoption of our products and services and our ability to retain and expand upon existing customer relationships, our plans and timing for, and the impact of transition to a subscription based and recurring revenue business model and our ability to compete complete the transition successfully in an entirely manner.
The impact of recent leadership changes, our plans for and the timing of of the release of new products, technology and services, the benefits and capabilities for our platform, competitive and industry dynamics, market size, and potential market opportunities and other financial and business related information. These financial these forward looking statements involve a number of risks and uncertainties some of which are beyond our control, which could cause actual results to differ materially and adversely from those anticipated by these statements. These forward looking statements apply as of today, and you should not rely on them as representing our views in the future. We undertake no obligation and explicitly disclaim any obligation. To update, alter, or otherwise revise these statements after this call.
For a more detailed description of these risks and uncertainties, please refer to our Form 10 Q for the third quarter of 2019 filed with the SEC on June 5, 2019, as well as our earnings release posted a few minutes ago on our website. Copies of these documents may be obtained from the SEC or by visiting the Investor Relations section of our website. Also, please note that unless otherwise specifically referenced, all financial measures we use on this call today are expressed on a non GAAP basis and have been adjusted to exclude certain charges. We have provided reconciliations of these non GAAP financial measures to GAAP financial measures in the Investor Relations section of the website and in our earnings press release. Lastly, Nutanix Management will be at the Deutsche Bank 2019 Technology Conference on Tuesday, September 10th in Las Vegas, and we hope to see many of you there.
With that, I'll turn the call over to George.
Thank you, Tania. Good afternoon, everyone. Q4 was a good quarter for us as we beat strict expectations on total billings and revenue and by $15,000,000 each for software and support billings and revenue. Going forward, we'll be guiding on software and support billings in revenue or total contract value TCV, as you call it. For Q1 billings in revenue, even as our business top line has been impacted by the subscription transition.
More on this later. From Duston. For the past 2 quarters, we've highlighted how we needed to rebuild our pipeline as we continue to transform our business to subscription. I'm pleased to report that our Q4 results demonstrated measurable progress in our subscription transformation. Our pipeline funnel, our sales re enablement, or simpler messaging on platform versus new apps and our hybrid cloud journey.
All this has enabled us to close our fiscal 2019 on a high note. While we still have much work left in our business transition towards a hybrid cloud model of licensing, we're encouraged by a progress to date, and believe that our solid quarter over quarter billings and revenue growth as well as our progress in sales hiring are clear indicators that our execution is improving and our market remains strong. We're particularly pleased to see such strong growth in our deferred revenue balances in Q4 with 44% year over year growth. Our remaining performance obligations or RPOs will remain a strong proxy of the underlying health for our business, especially at the life of device licenses, transition to term based licenses. Our subscription transition continues to move along at a rapid pace.
And just like our hardware to software transition in fiscal 2018, We are shedding significant top line for our future proof business architecture that will position us well in the era of cloud. Our sellers and customers responded well to the model change, and we believe that subscription and infrastructure software business, both on prem and off prem, will quickly become a core competitive advantage for the company. Our customers will be able to buy portable software licenses that can run both in a private cloud, and on bare metal offerings in the public cloud. We make a strong push for why hyper convergence matters even more in the public cloud virtual networks. And why data and applications need to be closed together, preferably on the same machines and physically within the same racks.
Just like this last decade, the sheer amount of data will make the network a little bit of enemy of applications. It's these laws of physics that make HCI such a powerful architecture even for hyperscalculative defenders. The flexibility of portable licensing will enable our customers to treat their private infrastructure as availability zones or AZs that are peers of the availability of loans or AZ from the public cloud. More importantly, they'll be able to move applications freely and redeploy Nutanix licenses back and forth, thus creating a true hybrid cloud. With a virtual private cloud, or VTCs as public cloud developers call them, experience on both sides.
Renting software won't be the domain of public cloud alone. As proven by the business model transitions in many large software companies this last decade. Customer success will be king, as we have hustle like SAS Companies to work on customer retention and churn, annual contract values, or ACV, net expansion rates, and lifetime value. These metrics will be the new vocabulary of Nutanix once we have moved the majority of our life of device entitlements. This is the why of subscription transition.
This is the y of our own digital transformation from appliances, to OEMs, to software, the subscription. And eventually to ratable as you hear from Dustin. This is the why of digital journeys within our customers as they grapple with the trade offs in technology of ownership versus access. Our digital transformation continues to be ahead of our expectations with subscription revenue up 16% from Q3. And now representing 71 percent of total billings, strong progress towards the previously stated goal of 75% by the end of calendar 2021.
Reflecting in Q4 and more broadly on FY2019, as our platform continues to make inroads into a hardware centric world of on prem infrastructure, We've made meaningful progress with our new apps, I. E. Essentials in enterprise that run on top of our core platform. We now see these new apps and 26 percent of our deals in a rolling full quarter basis, up nicely from 23% last quarter, and 17% in Q4 of FY 2018. This quarter also saw the addition of approximately 919 new customers our highest new customer infusion in the past 6 quarters.
These new customers included 31 new Global 2000 Locals bringing our new total number to 810. In Q4, we continue to see strong, large deal momentum with 58 deals worth more than $1,000,000 11 of which spent more than 1,000,000 with us in Q3. Of those 58 deals, 26 forward customers in the vehicle 2000, and 3 were worth more than $5,000,000. We now have 16 customers who spent over $20,000,000 a dozen lifetime bookings up from 9 customers at the end of FY18. Of those 16, 6 were over 30,000,000 in lifetime bookings.
We have 46 customers with over 10,000,000 lifetime bookings. Up from 26 at the end of fiscal 2018. More importantly, these metrics continue to show robust growth even though it's apples to oranges between the older TCV deal values and the newer term data still values. Our broader product portfolio drove large opportunity with new and existing customers. A great example of this was a deal worth more than $10,000,000 in Q4 alone, with a Global 500 holding company for insurance, reinsurance, and investment operations.
This customer was looking to adopt a hybrid cloud strategy and gain a price and performance advantage of its existing legacy infrastructure. After seeing both the simplicity of our enterprise dog platform, and the value we bring to a total hybrid cloud solution through database and automation offerings such as error and calm This customer decided to reset its entire data center strategy using our technology. Additionally, across our customer base, files, flow and Prism Pro are becoming strong additions to our portfolio. On the theme of deepening our penetration within G2K, The question of why Nutanix would come up to a casual observer. If you look closer at the JP Morgan Chase 2019 CIO survey, you would know why we are gradually becoming a trusted invisible infrastructure brand within the largest enterprises going through their own digital journey.
The world's frictionless, reliable, and invisible or synonymous with mechanics. We don't sell vaporware. Speaking rich, I specifically want to emphasize a Q4 deal with a total contract value of TCV of over $15,000,000 this quarter. And how a Fortune 25 customer selected our platform of the backbone powering its infrastructure across the U. S.
This customer was a lifetime spend of nearly $30,000,000 since the first purchase 18 months ago, selected our core platform with HV virtualization, over an incumbent that had over promised and underdelivered on true enterprise reliability with software defined infrastructure. Last quarter, we told you about a win with a new customer, 1 of the global 4 accounting firms that was worth nearly 6,000,000. In Q4, our team worked closely with this customer to understand the unique challenges we platform in the infrastructure for hybrid cloud. In a trend we are seeing throughout our business, One of our essential offerings, Calm, is allowing us to learn with our customers in the real meaning of hybrid cloud. This customer shared with us the critical legacy approach, it would take them years to realize their multi cloud vision, calm together with a core of the critical combination that made this win possible.
We are particularly pleased with our strong uptick in gross margins, which grew to 80% this quarter. Even as we carve out more bookings in the deferred revenue, that goes to our balance sheet. Most importantly, our support and customer success organizations continued differentiator solution, from the competition that being authentic and the approach to problem solving. Speaking of apps versus the platform, our database in the service offering error helped us with a new opportunity with a major American airline in the Global 2000. In a deal worth more than 3,000,000, with existing customer that has a lifetime spend of more than 10,000,000, decided to replace its proprietary heavily engineered database system for e Commerce with error backed by our webscale core running on commodity servers.
In another win this quarter worth more than a 1,000,000 with a Global 2000 Market National Healthcare company, we're able to expand our existing presence because of a rich product portfolio in data services, automation and security. Speaking of security, our federal government businesses top of mind for us as we build our hybrid cloud offerings. Earlier this month, the Nutanix Zai government cloud was listed in the FedRAMP marketplace as FedRAMP in process. Federamp is a government wide program that enables federal agencies to rapidly adopt cloud based IT solutions that meet stringent standardized security criteria. Federal agencies are already taking advantage of some of the services within the Xi government cloud as part of the civil entities.
This is a a significant step towards the full FedRAMP Moderate authorization, which has enabled federal agencies to take advantage of our Xi government cloud solutions. At our Investor Day in March, we spoke about our need to invest and focus on pipeline as we hire 100 of sellers every year. We're particularly pleased to see strong pipeline creation in our Enterprise segment yielding a surge in new opportunity for workload expansion in existing accounts. And ease global 2000 prospects. For the 1st 5 years, that is our 1,000,000,000.
We're mostly selling to the commercial mid market and large federal agencies. In the last three years, with an intense go to market focus, segmentation of the sales force and expansion of product portfolio, to build a world class enterprise focused company. Now in the next three years, we have to prove that we can balance the 2 ends of the barbell equally well. Selling both within the enterprise and to the commercial mid market at scale. With that in mind, this segmented commercial completely out for enterprise sales figures, and building a focused U.
S. Commercial sales leadership and organization on demand. We're also emphasizing higher digital touch at the top of the funnel, So prospects can go without any human touch from digital ads to our clusters in the cloud with a few clicks. Before I conclude, I'd like to take a minute to reflect the highlights of her past fiscal year. Fiscal 2019 represented a new phase of development for this company has been leaned into our hybrid cloud vision and expanded beyond our core infrastructure platform.
I'm pleased that Zai Cloud Services is generally available to the public. And they have helped create significant opportunities for us in both new and existing accounts. This year, also saw our multicloud might be stacked approach validated by the market with new partnerships with HPE and others, delivering customers more freedom to choose the hardware platforms that best fit their environment. We also grew our customer base 34 percent year over year with new logo additions. Finally, this year, we made tremendous progress in our subscription transition.
Having made a painful, a fundamental change in pricing for a new software and services model to work at scale. We grew our subscription billings 57 percent in fiscal 2019 fiscal 2018, while our gross margins increased from 68% in fiscal 2018 to 78 20 fiscal 2019. This last year, we, as we were adding new employees at a brisk pace, brisk pace, We also quantified our invisible cultural principles in how we maintain high standards of ownership, curiosity, and listening. We also feature in the Forbes Just 100 list of the 100 companies that are doing right by America. We're pleased to end the fiscal year on a resilient note as we plowed through one of the toughest transitions in the history of IT, going from hardware to software subscription.
I'm proud of the hard work and commitment demonstrated by our team members around the world. As we move into the new fiscal year, we'll continue to work through the business model transition. Foremost among them is educating our hardware centric ecosystem about the new subscription economy, annual contract values, and bite size selling. Hason Point is the way the channel is reporting our numbers to Allstate analysts, not realizing that we're not selling hardware anymore nor the impact of a subscription transition. This burden of proof and education lies in us as we are one of the first infrastructure companies to disrupt the hardware neighborhood with pure software vulnerable licenses and consumption economics.
Subscription's biggest value will be in complete segmentation of field activities. That is sales, hunting for new ACV, versus customer success, forming for the residual as TCV. And with 2 teams maximizing customer lifetime value or LTV in tandem. That focus and clarity of purpose in the coming 18 24 months and how we'll unlock the biggest efficiency gains in our builder market. I look forward to continuing to build the 2019 fiscal year As we completed our hardware to software transition this last quarter, it is a seminal moment for the company to start guiding to software and support billings and revenue.
We hope our investors find this to be a simpler way to model our business going forward. Speaking of simplicity, there's one more thing. We're gonna start guide giving out annual guidance. Well, the subscription transition makes it harder to project the full year Dustin will introduce the tradition of annual guidance because we believe we can tell a simpler, more compelling story of our 2 aspirational areas of investment. Our commercial business and our new apps and how they unfold over the coming year in the future.
Talk more about this quarter and the fiscal year, And now turn it over to Duston. Duston?
Thank you, George. I was pleased to see our fiscal year close out with a stronger Q4 performance versus the performance of with good momentum in bookings, new customer growth, large deals, and Global 2000 traction. Additionally, as Deeridge just noted the shift to our recurring subscription business exceeded our expectations during the quarter, and we continue to expand our pipeline. In Q4, subscription billings accounted for 71% of total billings, up from 65% in Q3. And subscription revenue now accounts for 65% of total revenue, up from 59% in Q3.
The faster than expected transition in Q4 was buoyed by some larger deals in the quarter. In Q4, our new term based subscription bookings increased 67 percent to 150,000,000 up from $90,000,000 in the prior quarter. And we expect these subscription percentage to fluctuate a bit plus or minus for the next couple of quarters. We are very pleased with the speed that we're working through our subscription transition. And as more of our business moves to subscription, It gives us more data to review for trends.
This allows us to gain incremental insight relative to the top line impact relating to the transition. During our Q4, we saw additional total contract value and balances between our 5 year term deals and life of device license deals, which resulted in less total contract value received on these 5 year term deals, versus what would have been realized on an try to correct this imbalance. However, for the we've assumed that this value differential will continue for the foreseeable future. We also saw the average duration versus a duration of approximately 3.9 years last quarter. This was a result of seeing more 5 year deals move to 3 year terms rather than an acceleration in 1 year deals.
This contract duration shift result in less upfront billings for the initial deal, with the difference being captured when the term renews. As a result of these trends, we're now planning for a negative top line impact relating to the subscription transition to be approximately 20% versus the into subscription in our industry have been quite as complicated as the one that we are now working through, which includes 2 very different pricing mechanisms, between the prior life of device licenses Despite this negative subscription impact to the top line, in Q4, our bookings performance rebounded quite well. As we exited I'll move on to some specific Q4 highlights, but before I go into the specific details for the quarter, when analyzing the absolute numbers and growth rates. Please keep in mind that we believe the total billings and total revenue as well as the software and support billings and software and support revenue performance for the quarter, were all compressed by between Total billings and revenue performance, was also impacted by $8,000,000 as we shipped less hardware than planned. Revenue for the fourth quarter was within our guidance range of $280,000,000 to $310,000,000, coming in at 300,000,000 down 1% from the year ago and up 4% from the prior quarter.
Hardware accounted for 4% of total revenue, down from 8% in the prior quarter. Software and support revenue was $287,000,000 in Q4, up 7% from the year ago quarter and up 8% from the prior quarter. Total billings were $372,000,000 in the quarter, within our guided range of $350,000,000 to $380,000,000 representing a 6% decrease from the year ago quarter and Software and support billings were $359,000,000, flat from the year ago quarter and up 11% from the prior quarter. Our builder revenue ratio in Q4 was 1.24, up from 1.2 last quarter. New customer bookings represented 26% of total bookings in the quarter, down from 31% in Q4 'eighteen, and up from 25% in Q3.
In Q4, our software and sport bookings from our international regions represented 45% of total bookings, versus 40% in Q4 2018. Our non GAAP gross margin in Q4 rose nicely to 80%, 3 percentage points better than our guidance of 77%. Operating expenses were $344,000,000. And our non GAAP net loss was $106,000,000 for the quarter or a loss of $0.57 per share. A few balance sheet highlights.
We closed the quarter with cash and short term investments of $909,000,000. That's down $32,000,000 from Q3. We used $10,000,000 of cash flow from operations in Q4, which was positively impacted by $12,000,000 of ESPP inflow. And free cash flow for the quarter was negative $33,000,000. This performance was also positively impacted by the $12,000,000 of ESPP inflow.
In the quarter. Now turning hardware has become an insignificant percentage of our total billings and revenue, and therefore, going forward, rather than providing guidance for total billings and total revenue, we will only specifically guide to software and support billings and software and support revenue. We will also provide an estimate of hardware as a percentage of total billings. So on a non GAAP basis, for Q1, we expect software and support billings to be between $360,000,000 $370,000,000. Software and support revenue to be between 290 and $300,000,000.
Hardware billings and hardware revenue to be 3% or less of total billings. Gross margin of approximately 80 percent, operating expenses between $385,000,000 $390,000,000 and a per share loss of approximately 75 dollars using a weighted average shares outstanding of approximately $190,000,000. The guidance for Q1 assumes the following: an estimated 20 percent or $25,000,000 to $30,000,000 top line compression related to our subscription transition. Approximately 10,000,000 lessened hardware billings and revenue versus current street estimates, and a bill to revenue ratio of 1.2 versus current street estimates of 1.20 impacting total revenue and software and support revenue by approximately 10,000,000. The 20% top line compression related to the subscription transition impacts the Q1 year over year growth rates by approximately 7 percentage points.
The software and support billings guidance of $360,000,000 to $370,000,000 compares to the current street estimates of $355,000,000. The software and support revenue guidance of $290,000,000 to $300,000,000 compares to the current street estimate of $290,000,000. Our planned increase of $40,000,000 to $45,000,000 operating expenses in Q1 is primarily coming from the following expense categories. Planned increases in headcount, particularly in sales and engineering and regular course merit increases that are effective Q1. Cost associated with our annual global sales training and enable meeting, enablement meeting, and continued growth in our demand generation spending to fuel our planned growth for FY 2020, including our annual EMEA dot next to conference in Copenhagen, which was moved up from Q2 last year to Q1 in fiscal 2020.
Now turning to the details of our fiscal 2020 guidance. This is the first time that we have provided annual guidance. Our subscription transition has clearly added complexity to the business, which has made it tougher for the investment community to model. We hope that this top level view of FY 2020 will help provide some clarity on our expectations for the year. For fiscal 2020, we expect software and support billings between 1,650,000,001,750,000,000 software and support revenue between $1,300,000,000 $1,400,000,000.
Hardware billings and hardware revenue to be 2% or less of billings. Gross margin of approximately 80% and operating expenses between $1,650,000,000 $1,700,000,000. This guidance fiscal 2020 assumes no major economic downturn during the fiscal year, and no material change to the current average subscription term, of 3.7 $170,000,000 approximately $45,000,000 less in hardware billings and hardware revenue versus the current street estimates. The estimated 20 percent top line compression related to the subscription transition impacts the fiscal 2020 year over year growth rates by about 80 percentage points. The software and support billings guidance of $1,650,000,000 to $1,750,000,000 compares to the current street estimate of $1,600,000,000 and reflects a year over year growth rate of 17% to 24%.
The software and support revenue guidance of $1,300,000,000 to $1,400,000,000 compares to the current street estimates of $1,300,000,000 and reflects a year over year We will continue to push through our transition to subscription, as quickly as practical. We have targeted our subscription based billings to be greater than 75% by the end of FY20. We are also aware that as our business increasingly transitions to subscription, our go to market cost structure must also transition to a more efficient model that resembles the efficiencies of other subscription or SAS models. Although this will take some time to accomplish some of the early thinking and work has already begun. We remain bullish on several of our newer products as they are starting to become a bigger deciding subscription based products throughout FY 2020.
We believe these newer product offerings will ultimately enhance our top line growth, and protect our value proposition in the years to come. FY 2020 will also be a year they'll have renewed focus on investing and growing our commercial business. Our enterprise business is showing good signs of strength from the investments in FY 2019, and we expect an improved commercial performance in FY 2020. Our expectations for FY 2020 clearly reflects the impact of the subscription transition as well as the the projected negative operating margin in FY 2020. In this transitory year, we would expect cash usage in the low to mid $200,000,000 range versus the current street estimate of 190,000,000 with the subscription transition accounting for a vast majority of this estimated growth rates for FY 2020 do not materialize as planned.
We will prudently manage operating expenses accordingly. In summary, we continue the tough work of transforming the business model with a view on the long term despite the short term impact to the business. It's been nearly 2 years since we started the transition from an all hardware model to an all software model. It was this transformation that laid the foundation for our current transition from an all software model to an all subscription model. And it will be the all subscription model that will ultimately lay the foundation to our 3rd and final phase of transforming the company.
With the final phase being the all ratable model. Once again, despite the significant short term, optical impacts to the business, we are already planning how we might make this next and final phase, the all ratable phase, a reality at some point in the future. And with that, operator, if you could now open a call up for questions, that'd be great. Thank
Your first question comes from Jason Ader from William Blair. Your line is open.
Do you Dustin,
I think you mentioned two and a half x on the backlog versus the prior quarter. Can you just talk about I guess what drove that specifically?
I think it was good execution, obviously in the, in the field, We knew that was going to, rebound eventually after two quarters that we weren't very proud of. And, you know, we ended up with some, with some good backlog build in the quarter. And we'll see how this quarter goes, but we would hope to do the same thing, but we'll see how it goes.
Okay. And then, Dheeraj, just for you, when we think about the kind of hybrid cloud pitch from Nutanix and let's just say I'm I'm a company that's got, an on prem infrastructure that's, say, transitioning to HCI. And I've also got a public cloud strategy and I'm working with, let's just say, Azure to, move apps over time from my private cloud, which is based on CI 2 public cloud, which is obviously, you know, a different, architecture today, is the pitch that, you know, stay with Azure, but just move to the bare metal mechanics offering on whichever public cloud and just kind of keep everything consistent. Is that ultimately what you're trying to convince customers to do?
Yes, I think there's, thanks for the question, Jason. There's 2 parts to this. One is, there's the data plane, the data plane, the control plane, and then the management plane, you know, there's 3 layers of the stack here. And customers really like our data plan because it's reliable, highly available. And when I say data plan, I'm not don't just mean, software defined storage.
I mean, filers and object storage and even our segmentation micro segmentation kind of like network products. At the end of the day, when they want to take this to Azure, in fact, we're already talking some of our largest customers to people who take Nutanix to Azure. They want to use Azure's billing claim and identity and data centers and things like that. So there will be a certain blurring on the lines between what they want to use from Azure, which could be Azure credits and how they can burn those credits by using a Nutanixlect technology. I think that's where the world
is really headed for us.
Okay, thanks.
Your next question comes from Lindsey Mohan from Bank of America. Your line is open.
Yes, thank you. Thanks for sharing the fiscal year guide. I was curious about your confidence in putting this out there given just that there's so much macro uncertainty. You've seen some very material misses in storage and server land. And just curious if you're baking in a tougher macro backdrop in your guide.
Versus sort of the last couple of quarters when you thought most of this was execution related? And I have a follow-up.
Yeah, thanks. Well, obviously, good question. I'm going to take a stab at it in an industrial issue too. I mean, there's basically 2 macros. 1 is the macro macro and 1 is our own subscription macro.
And right now, we are very, very much focused on that one macro that we can at least get a little better handle on. And we think that If you can keep that in control, I mean, as Duston mentioned, about 3.7 a year term, I mean, modular of that, I think we believe that, we have things in our control. And we are obviously investing towards growth as well, but, at the same time, if the macro re changes, then, overall, our investments in sales and marketing will also reduce and we'll adjust accordingly. Yes.
I mean, we haven't, you know, since we last updated on our thoughts there, there's really been no, additional signs or signals that we've seen now, who knows what the future brings. But, over the last 3 months, this, in our view, anyway, now Again, at $1,500,000,005, we don't have this massive view of the world here. But from our perspective, there's really no change from, from our view 3, 3 quarters ago, 3 months ago.
Okay. Thanks for that. And, Birrah, you said you need to balance the large enterprise brokers versus U. S. Commercial sales segmentation.
Why is this the right time to resegment the sales force? And where do you think the incremental investments that you're going to make over the next year, where will those be most geared toward? Thank you.
Yes, I think the question of right timing, we have a much better sort of grasp of the segmented enterprise sales force. We've been doing it for the last two and a half years now. If you recall, of February 2017 call, we talked about segmentation, segmentation segmentation. We did that for almost 2 years. I think we have a pretty good grasp on it.
And, Now our sales leadership actually believes that we can now focus on commercial. There is a better marketing engine for commercial. We think that we have a better brand as well that can seep from the enterprise down to commercial. And, digital delivery model is now coming together where as I've mentioned, you know, banner ads with 1, with a couple of clicks, you can actually get to doing a POC and kick the tires and mechanics without having to reshape a box and do all sorts of things that appliance companies used to do. I think, we'd love to do more and more digital touch, with our prospects before they didn't pick up the phone and call a human being in the sales force.
Your next question comes from Jack Andrews from Needham. Your line is open.
Good afternoon. Thanks for taking my question. Wondering if you could drill down a little bit more on the commentary around 26% of deals, including a product outside your core offering. You talked about some of these newer products becoming a deciding factor in winning larger deals. Could you provide a little bit more color, on any one of them in particular that that's really helping you, move the needle on this front?
Yeah. Obviously, we understand, you know, data really well files has taken off in a big way. So we're going after application data now and files to me the system record. So with capacity, we'll we see that one product actually make a lot of progress in terms of dollars that we make on on files. Flow is a little bit more of a control plane.
So we won't see the exact same kind of dollars, but the fact that flow is, pulling age think about when people really like micro segmentation, we're extremely lightweight, easy to use, they start pulling our hypervisor as well. Even though our hypervisor is licensed free, And on the systems of engagement and intelligence, you know, think about, era and Calm, they've done a pretty good job of, really having a more of a solution sell approach. So error is more for database workloads. And you're going and talking a language to the database folks and including, to the DevOps, outside the West Coast, about how they should manage databases. And that pulls the core as well along with as we start thinking about the workflows, we're not thinking about infrastructure workflows or virtualization workflow.
You're thinking about database workflows. And similarly, Calm is now, the system of, engagement, that we think we can integrate with Beam and APOC to make it a system of intelligence as well, which is basically multi cloud workforce. How do you really think about, the private cloud, both the mechanics stack as well as a VMware stack and how do you think about Amazon and Azure? And then how do you start to drag and drop these applications between different clouds. I think the future of multi cloud will depend on how easy do we make mobility the idea of motion of applications across different clouds.
So I think between Calm error, files and flow, we're making tremendous progress. And There's another system of intelligence called Prism Pro, which, we are going and upselling to our customers about around operations management and that's about monitoring, alerting, you know, doing a lot of machine learning around our machines and making sure that our support actually doesn't have, as painful, an experience when it comes to debugging customers' problems. Great. Well, I really appreciate the commentary around that. It was a follow-up question.
Dheeraj, you talked about, how you've been disrupting channel market, which is historically a hardware centric market. I was just wondering if you could expand a little bit more on your thoughts there. If you think about trying to gain a broader presence with channel partners, do you think it's better to maybe go deep with a smaller number of relationships who really understand your products or think you can gain enough significance in market presence with a larger number of vendors who may be selling, dollar volumes of competing products essentially? No. I think less is more with any relationship.
And, we've done a good job with a few, and we believe that at least in the US, we have a good handle on this. Obviously, internationally, there is a lot of fulfillment that channel actually does beyond just lead generation And at the end of the day, we are lucky if you actually get a few of them to really go deep and that's where the focus has really been Sometimes the customers bring their preference. They're like, I would like to do business with this channel partner and we basically, work with the customer's interest there. But mostly we work with, few partners and try to give them more business as the quid pro quo from the actually, from them translates to us too. Great.
Thanks for taking my questions.
Your next question comes from Rod Hall from Goldman Sachs. Your line is open.
Yeah. Hi guys. Thanks for the question.
I wanted to start off, I guess, and ask about the the margin trajectory here, if you look at the, if you back up the hardware pass through, and you just look at the software margins in the quarter and the support margins, the the software margin seemed to dip quite a bit then the support margins are up a lot. And I'm assuming maybe that is related to the success you've had with the contract sales. But I just wanted to check that, Dustin, see if you can bridge that for us at all. So we understand those dynamics and those underlying margins. And then I've got a follow-up.
Yes. It's a little more confusing than that. Internally, we kind of look at it in its entirety just because the way some things work here. But, in Q4, we actually had a year to date adjustment There was no impact to total margins, but a year to date adjustment, that flowed through in Q4 COGS coming out of support, and going into product. And I think if you do the calc there, it's probably, you know, a 4.5% or so pickup to the, to the support margins and probably about a 2.5% decline in the product margins from that make up.
Now it's kind of a a change for the entire year there. So let's do some of our cloud based offerings. And it's probably the COGS are more appropriate into into the product category there. So again, we kind of look at that in its entirety anyway from a margin perspective. So hopefully that gives you some clarity there.
Are you are you saying that that's just a one off that doesn't carry forward as we look into next year, really, it just affects that Q4?
Yeah. I know those COGS, on a quarterly basis now will go up into, in the product and out of support. So there'll be a little ongoing shift there, but, again, there's no impact to the total.
So that, but the shift is what you loaded in there is the whole year loaded into 1 quarter. So the impact going forward won't be quite as big as what we see there in the Yeah. Correct. Okay. Okay.
And then the other The other question that I have for you guys is on the, you know, the just looking at the full year guide and the rule of 40, obviously, we calculate a pretty low number there. And I just wondered how you're thinking about the rule for you now in the context of all this.
Yeah. This is a transition. And you know, you see the growth rates from, you know, the guidance perspective and the impact that we see on the, on the subscription piece.
And once we actually get to ACV, right now, we can't do that because we perform on?
Yeah. So there's there's a lot of complexities in here, but, you know, we've got work to do on that. And, and, it's going to be a while, obviously, before we get back to that and this, say, this transition, you've got some apples and oranges going on from a comparative perspective too.
But it's still a governing kind of principle the way that you guys are running the business? Or is it sort of something that you're cabling for now and maybe revisit in 'twenty one? Or how are you thinking about that?
Yes, I mean, it's hard to in a transition year like this, but so impactful. It's kind of hard to, to govern that. Obviously, we'd like to get the cash back into a neutral position here as soon as we can and the growth rates accelerated. And I think ultimately the rest takes care of itself here, but we'll need to flush through a few things.
Your next question comes from Aaron Rakers from Wells Fargo. Your line is open.
Yes, thanks for taking the questions. I have 2 as well, if I can. So on the first question, I just want to understand kind of just a clarification, if you will. The 2.5x increase
in what you're calling backlog,
Is that the backlog remaining performance obligations or contracted, you know, obligations that you you, you know, sit on top of? The deferred dollars or you referring to pipeline? I'm just I want to be clear because that seems like just a massive number considering that I think your contracted value is like the 800 and $45,000,000 after the last quarter. Can can you just give us exactly the context behind that two and a half at toll free?
It's simply an order that we have not built.
Okay. So is that, is that what would be disclosed as contracted, not yet revenue recognized accounts? No. Yeah.
I think you're probably, looking at two numbers deferred revenue, which obviously is long term. And then there's a very, very short term stuff, which is for the next quarter. It's just deferred billings, actually. Yes.
I mean, this is simply bookings that, haven't, haven't been, you know, we got the order in from the customer, but it it simply haven't been billed.
Okay. So maybe a different way to ask you is I think if you wish at the beginning, you said the the remaining performance obligations would be an important metric to consider as far as your your business trajectory going forward. That that is something that's actually disclosed in the 10 queues, I believe. So that that number is actually something well north of for revenue, correct?
Yes, I'm getting confused on your question here. But again, this backlog that we're referring to again is orders that have come in might have been at the end of the quarter, whenever, that we simply haven't, build the customer or done anything with that order.
But the deferred revenue is 90910,000,000?
Yes. 910 for the quarter. Yeah. Yes, we'll disclose the same stuff we've always done in this case, the Q, but in this case, now the K here.
Okay. Okay. And then I guess thinking about the model and the operating expense trajectory, you know, the guidance was quite a bit higher than what I think the street was looking for. Can you just help us understand how you think about kind of the path to profitability or what kind of level of breakeven? You think about from a model perspective?
Yeah. I mean, we've got some work to do on that, again, through this transition time here. You know, we've got some investments and I think ultimately you have to believe that these investments, will pay off in the future for higher growth rates. And I think we've started to see that. I think if you look at the new products, I wouldn't expect us to disclose this every quarter, but think if you just look at new products, that we define as, essentials and enterprise and you look at it, you have to cut it down to a ACV and annual contract value.
In FY19, those new products, represented about 10% of our total annual contract value in FY2019. So that should give you some feel that these products are getting traction That's no bundling, by the way. This is these are kind of being sold by themselves. At some point, we'll actually even start doing some thoughtful bundling on these products. And it doesn't say obviously everything else they're dragging along with them.
But you've got to have a belief that what we're investing not only in the product side of the house, but the go to market side of the house is going to pay off in the future.
Oh, sorry. At the Investor Day, we'll probably come back and talk about the 3 year view as well.
Yeah. Yeah. It's hard to do, obviously, on call like this, but, it's fair questions, but we'll give a clearly, a renewed view.
Your next question comes from Alex Kurtz from KeyBanc. Your line is open.
Thanks. Thanks for taking a couple of questions here. Dustin, when we look at the North America, sales organization and and what's been going on there last couple of quarters, you know, how would you characterize productivity across different cohorts, any kind of metrics around how I know you just gave out this backlog number as as a signal of that, but is there anything else we can kinda dig into? And then, your largest competitor is obviously having a big event this week and there's a lot of discussion around Kubernetes being integrated into their core compute product and just some high level thoughts about where Nutanix stands today on that topic.
Sure. Yeah. In fact, while Dustin looks up desktop for adjusted numbers of TCV, I'll take the question around Kubernetes and the rest. So if you think about our strength, we are, foundationally based on Linux. And the core container engine is really Linux based.
And that's our core competitive advantage. We're actually getting a lot of benefits because our hypervisor and our entire stack, including our controllers, they're all Linux based actually. And now the real magic will come around this, how do you make an enterprise grade, reliable, available, high performance? And then, encircle the compute engine, which is the Docker engine of Linux with storage and networking and security and, management planes and being able to drag and drop them across clouds. That's where the real monetization opportunity of Kubernetes really is.
So we are coming from our strength because we are Linux based and VMware is coming from its strength, which is its installed base. But they still have Vsphere that is not Linux based. So I think, we are more aligned with the cloud hypervisors. If you think about, Amazon. And if you look at what even Azure is doing now, when Google has, they're all based on Linux.
And, we think we can get a lot of advantage of really taking Linux everybody rather than having to build a proprietary cord this around that. And, I think also competitive speaking, you know, we have been a company that's really about data and design. That's how we lead with. There's a lot of products that we built in the last 4, 5 years that, we bolster our data position around not just data for virtual machines, but data for containers, filer data, Object storage that just came out recently, and then finally databases of service. There's a lot of things that
we're doing around data and making it really simple, which is around design, which was very differentiated. On your question Alex on North America. It's still early. But I think, Chris and team have, have made some really good progress in a very short period of time. I think, we always look again on productivity at a rep, a ramped rep basis on a rolling two quarters.
And, you know, clearly, that productivity in North America We always take Fed out, but there's a total lumpy. But from a, from a, you know, Christmas territory without Fed, improved on a rolling two quarters. So lots of good things happening there, and Chris has taken a disciplined approach, obviously, to run-in the business. So lots of, lots of good stuff happening there, but it's early. And you know, we're particularly proud of what's happening in APAC.
I think, you know, the team there has done a, a really good job. Their productivity on, again, on a rolling two quarters basis on the ramp rep have gone up, 3 or 4 quarters in a row here now. So they're on a pretty good run what they're doing there, and we're happy to have Sammy take over the leadership in EMEA. So I think we've got 3 great leaders here now that, you know, we'll kind of perform in harmony here. And I think the execution will continue to, to improve.
Q1 is always a tougher quarter, in general, but we're excited to, to have some good focus on all three of these regions.
Your next question comes from Katy Huberty from Morgan Stanley. Your line is open.
Thank you. Good afternoon. Just looking at slide 15, you showed lifetime bookings which have moved up into the right over the past 3 years in 4Q that that metric leveled off. Does that tie to the transcription transition or is there another explanation for that, the expansion of that multiple slowing?
Well, if, you know, top line compression, obviously, 20%, doesn't help that multiple. But we'd have to get back to you on exact specifics. If you're talking about the global, are you talking about Global 2000 repeat multiple?
Yes. On slide 15, the lifetime bookings multi that that you provide is maybe, look, past 3 years, every quarter they've increased, and and then there was a leveling out. I mean, even last quarter, there was a big jump in in in the multiple, even with the the weaker revenue trend. But we can talk about it offline.
Yeah. Clearly, you know, taking $20,000,000 to $25,000,000 out of the top line but we'll get you a specific answer.
Okay. And then, Diroj, earlier in response to a question, you talked about some of the the apps that are driving engagement and and and revenue. It sounds like files in Prism Pro contributing the most revenue now. Is that correct? And then when you think that to fiscal 'twenty, are there new apps that you think can hit an inflection point in terms of revenue contribution?
Yeah. You're right. I think files and and Prism Pro are too, and we are about, a top on pricing model change for both error and, and frame around per desktop per user, your kind of a license, which will basically pull through the core other than us pricing core differently from frame itself. And similarly for air, it could be a based on socket. As well.
So there's, there's some, pricing simplification that will actually help us have that solution based approach which will help, these two products not have 2 separate discussions, you know, one is why I sold you the core. Now I'm going to sell you from control planes or management planes. Think those are the kinds of discussions we're having, but I think, Era, and, Calm and Frame are the 3 that we believe could really take off from here.
Your next question comes from Mark Murphy from JP Morgan. Your line is open.
This is Pinjalim from Mark. Definitely on the next year guidance, is it going to the 75% subscription revenue mix? Do you proceed on your risk and duration, for the company's license to contract a little bit, but is there, is there any specific incentives that's been given sales reps to drive a 3, 4 year deal? Or I mean, could it, in terms of flexibility? I mean, could it go towards that 1 year level when you next year, I mean, you will probably not go to 1 year, but is there a more risk in that number?
Well, you know, one of the things that we are still trying to learn from market is, how infrastructure is still considered CapEx? For
a lot
of our customers, especially in the large enterprise. And until, commercial becomes like, really, really, you know, large for us. I would assume that infrastructure would still be consumed in a 3 to 4 year kind of horizon simply because a lot of CFOs still look at it as CapEx, actually. So there's some, sort of understanding of, how the market perceives infrastructure to be because our competitors are still selling hardware. And that's going to be one of the balancing acts that you'll actually have to play with.
Now if the market wants to do 1 year terms, we should not come in the way. We should not just spiff anything unnatural to say like don't sell 1 year mean, definitely we want to do 3 year contracts. The question is, how do we collect and how do you actually compensate for? I see. Understood.
Okay. And, secondly, on the sales, new group that you talked about on the enterprise side, do you perceive any kind of any kind of disruption around that, and seems like it's in U. S. And if that is baked into the numbers that you gave us? Yes.
I think in the last 12 to 18 months, we have done a lot of segmentation for the enterprise anyway. So a lot of the territories we're talking about in the commercial space is white space. And, Chris really believes that we can get the flywheel going if we were methodical with commercial and investments in commercial as well.
Our last question comes from Karl Keirstead with Deutsche Bank. Your line is open.
Okay, great. Thanks. 2 for Dustin. Dustin, on the operating cash flow, I just want to make sure I heard you correctly. I think you guided for fiscal 'twenty negative $200,000,000 to $250,000,000.
So I just want to confirm that that's correct. And I wanted to ask you, as we look out into the following year, fiscal 2021, do you think you know, you're on a trajectory to realist realistically get to operating cash flow, neutral that year or given the ratable transition and the weight on cash flows, that could be a stretch.
Well, let me clarify the first thing. That kind of cash range we gave for, for FY20 is free cash flow, not operating cash flow.
Okay.
Okay. So it includes all CapEx, in that number. So, obviously, the operating cash flow would be a lot better than than the number that we had mentioned. And, you know, we'll work through this. You know, I think, you know, as we get a majority of, of the, business transition to a subscription that obviously the cash usage has to come down and it will come down over time, whether it gets neutral, you know, in, in fiscal 'twenty one.
Again, it's kind of a, yearly look that will give investors, again, at Investor Day and some other thoughts, I'm sure.
And again, about collections with the collect here upfront or not. These are all the questions that we're going through right now.
Okay. That makes sense. And then just my second and last question, Dustin, back to the question around the OpEx guide for fiscal 2020, and how you might start to moderate that. You mentioned that you are beginning efforts to, make your sales structure more efficient. It sounded like those are actions different than the split between commercial and enterprise that, you just mentioned.
So without getting into too much detail, I'm sure it'll come later, but just broad strokes What is the vision to get your sales efficiency a little bit more in line and hence that OpEx number under a little bit more control? Maybe high level thoughts would be great.
Yeah. I think it's, you know, similar to other types of subscription businesses. How do you take advantage of renewals and how do those play into the equation? And, and how do you get some efficiencies? How do you get the productivity In theory, these renewals, take on a little different, feel and look from a simplicity perspective and does that enhance productivity?
There's a lot of things, that we need to go look at. We realize we need to look at it. And, we understand that there's some efficiencies that needed there. We're in the early stages, quite honestly. And, you know, we'll, it will take some time, but we understand we need to do that, and and we're we're thinking through it.
Yeah. I mean, you know, the industry would be a good place to talk about some of these things.
There's no further time for questions. I'll now turn the call back over to the presenters. Thanks very much for joining us today. And as we said earlier, we'd love to see some of you at the Deutsche Bank Conference. We'll talk to y'all soon.
Thanks. This concludes today's conference call. You may now disconnect.